Ichimoku Trading Strategy

Ichimoku Cloud Trading Strategy

Whilst Ichimoku us quite a simple trading strategy, it can be a little overwhelming when you first add it to your charts as it certainly makes them look very busy! Hence the reason I have moved it into the ‘advanced’ strategies. I also feel Ichimoku, although very accurate on its own, is best used alongside other indicators such as RSI & Bollinger bands, which is another reason I have placed it in the more advanced section of the strategy guide.

Ichimoku Cloud is a technical indicator, it’s accuracy when you look back over previous data, is often pretty scary, but my favourite thing about it, is that it also predicts the market movements well in advance. This gives you a great edge in your trading activity. It also allows you to trade with a smaller stop loss than many other strategies, meaning it is great for those who have less appetite for risk.

Getting The Ichimoku Indicator

My personal preference for charting, is Trading View, not only does it have amazing functionality, but its library of public indicators is phenomenal (and it has both free ad paid options available).

To get the cloud on Trading View, follow these simple steps:

Firstly, head on up to indicators at the top, then when the search box comes up type Ichimoku into it, and you will see an indicator named Ichimoku Cloud, this is the indicator you want to add to your chart.

If you are using MT4 (Which comes free with most Brokers) You simply navigate to Insert at the top menu, then Indictors > Trend > Ichimoku Kinki Hyo.

Ichimoku Cloud Strategy Guidelines

The Cloud is a momentum indicator, it helps us identify the direction of the trend, and also acts as resistance and support.

It can be a little intimidating when you add it to your charts at first, as there seems to be an awful lot of lines and it appears very busy, however, these lines serve a purpose. They feed the cloud the information it needs to make accurate predictions.

The lines, are effectively moving averages.

The lines outside of the cloud are as follows:

Pale Green Line : Chikou Span (CS)

Dark Red Line : Kijun Line

Blue Line : Tenkan Line

The lines the make up the cloud itself are:

Dark Green Line : Senkou Span A

Pale Red Line : Senkou Span B

The gaps between Senkou Span A & Span B are called Kumo.

The colours may be different on different charts softwares, for example the Chikou Span, is often shown as a black line. See this image to clarify:

Each of the lines have a different function, and you can if you wish, learn the function of each, but it all honesty, I am more interested in what they are doing than how they are doing it!

But in a nutshell:

Chikou Span, is a lagging span indicator, it plots itself based on what happened 26 periods ago (a period is defined as the minutes of the chart you are working on) and it gives you an idea of where price was at in the past, it often provides good support/resistance points for us.

Tenkan Sen represents the mid point (average) of the last 9 candles.

Kijun Sen represents the mid point (average) of the last 26 candles.

Senkou Span A & Senkou Span B make up the cloud boundries, they are ditacted based on what the other lines do, but their main difference, is that they are plotted into the future. Span A is plotted 26 periods into the future, and Span B 52 periods into the future.

This gives us a fantastic prediction of what price is going to do, in the near future.

When price is above the cloud, we are in a bullish (long or upward) trend.

When price is below the cloud, we are in a bearish (short or downward) trend.

If price is sitting in the cloud, and not really breaking out one way or another, then we are in a consolidation period.

 

Ichimoku Cloud Entry

So, let us now look at the entry criteria for taking a trade on the Ichimoku cloud. Bear in mind, there are a lot of strategies, utilising the cloud out there, but this is just one of them.

Step 1

Price must break through the cloud, and then wait for the candle to close.

On a Buy trade, you are looking for price to break through and close above the cloud.

On a sell trade, you are looking for price to break through and close below the cloud.

When price breaks the cloud, is it a good starting indicator that the market trend is about to shift.

Step 2

After the price has broken out of the cloud, then that is when we look for the crossovers of the lines, to confirm the entry.

when the Tenkan (Blue), Crosses the Kijun (Dark red) from below, this would be considered a bullish (buy) signal, and when this happens in reverse i.e. the Tenkan crosses the Kujin from above, this would be considered a bearish (sell) signal.

So the line you really want to be watching at all times is the Tenkan line (Blue).

Look at this example here for instance (and then look at the drop you would have benefited from had you taken this sell trade!):

 

Step 3

You can in theory buy or sell once these two criteria are in place, however, I would always suggest waiting for the close of candle, in case of a ‘fake out’.

Risk Management  & Exit In The Ichimoku Cloud Strategy

As always, it is very important to set your risk management before you enter a trade, so you can trade robotically and not let your emotions cloud your judgement.

Mindset is actually the most difficult thing to master for any trader, and will contribute hugely to your success.

So, decide your exit strategy before you get into the trade, and STICK TO IT!

There are two aspects to risk management in trading.

Stop loss, and exit plan.

Stop Loss

Your stop loss depends on your own risk appetite, and not only does it protect you from large losses, but it also is important as it controls what lot size you will be using. (Check out our lot size calculator for more information on this)

For this particular strategy, you can set your stop loss to the start of the original candle that broke the cloud.

You are also able, if you wish, to use a trailing stop loss, I am personally not a fan of trailing stops, I find they don’t allow much breathing room for the trade.

I do however, recommend manually moving your stop losses into ‘stop profit’ positions after every retracement is complete. This is a much more advanced strategy, and if you’re not at that point yet, then feel free to either, watch the trade and close when you feel it has ran its course (more on this below) or set a trailing stop.

Exit Plan

Now obviously, setting a trailing stop (although not my personal ideal) is a much more ‘hands free’ way to manage the trade, but as the lines on the Ichimoku cloud move, there is no set take profit you can add to the trade, which means the alternative is ‘babysitting.’

You will need to check the trade on a regular basis, usually every 15-30 mins.

Once the Tenkan (Blue) crosses back over the Kujin line (Dark Red) Indicating the trend may be starting to reverse.

You could also wait until price has broken the opposite side of the cloud, but this is more risky, because yes, your exit at the crossover could have been a retracement rather than a true reversal, however, it could be the start of a reversal, in which case you are going to lose a large portion of your profit.

Remember, there are thousands of trades every day, get out at a less risky time, and then look for the next trade 🙂

Other Things To Note

This is just one variation of the Ichimoku trading strategy. Many people opt to use the cloud as a support and resistance technique also, so for example if price is moving up above the cloud, comes back and bounces off it, this is a good time to enter a trade as it is the end of a retracement. So you can have a play around with varying Ichimoku strategies, and see what you find works best for you. But this is a very simple, concise strategy that has a good win rate.

As always, your demo account is your lab! Get in there, and get testing. Don’t attempt to go live with this immediately, trading takes patience and practice, and can be risky if you’re not prepared enough.

Until Next Time…

Happy Pipping!